The Daily Fix - Inter-Market Analysis and Macro Insights

If Asia has set the mood for Europe, then we can expect weakness to kick in on the European open, although the extent of that weakness could depend on the European banking sector and whether Italian BTP spreads widen relative to German Bunds.

The USD index has undoubtedly attracted a bid today, with EURUSD looking heavy and yesterday’s session low of $1.1564 has been taken out, and it feels as though we could be down at 1.15 if the BTP/bund yield spread pushes through 3%. EURUSD printed a bearish outside week reversal last week, and the follow-through selling in the past two days shows the bears really have the upper hand, and that the balance of risk here is for a move lower. The Italian MIB has an interesting correlation with the EUR and trading the Italian equity market means watching the tape and price action closely, because as we saw yesterday, the index can and will turn aggressively, with the index closing close to session lows.

(Source: Bloomberg)

S&P 500 and FTSE futures are a touch lower since re-opening earlier, perhaps taking in some influence from the Hang Seng which is 1.9% lower on the day. Clearly, futures markets would be weaker if it weren’t for the fact the Nikkei 225 is up 0.2% on the session, although well off the earlier highs of 24,448 and the lack of follow-through steepening of the JGB 2s10s yield curve has seen Japanese banks held back a touch

The ASX 200 has been offered 0.7%, which is a bit of a surprise given moves in oil and the positive close in the S&P 500, but it is clear the NAFTA news was fully discounted yesterday. Financials have taken out 21-points from the ASX 200, which itself is currently not far off session lows of 6118, although volumes are 13% below the 30-day average for this time of day. Banks are a tough buy here, not because they are bad investments, but because the impact from the recent news flow into future earnings is so tough to ascribe value. Then we can throw in also signs of vulnerability in house prices, specifically in the Sydney market and one also questions if semantics from a weaker European equity open could also be in play.

As a Segway, today's RBA meeting was a non-event regarding generating volatility, and that is no surprise given the daily AUDUSD ATM straddle was priced at 36-pips. So, no one was expecting fireworks here and it feels as though the statement from the bank does enough to justify the 16bp priced into the Aussie 30-day rates market for end-2019, and there is just too much new information needed before we can clearly define if the next move in the cash rate is up or down. AUDUSD completed a bear flag on the daily chart, and the balance of risk here is for a re-test and potential break of 72c.

As mentioned, S&P 500 futures are a touch lower through Asia and trading this market is relatively straight-forward, in so much that price needs to push traders into a position. The battle lines are clear on the daily chart, where a daily close above the double-top at 2947 would give me a reliable buy signal. Conversely, I would be taking out short positions on a close through the 26 September low of 2907.5, where we can see momentum in stochastic oscillators building to the downside, and this would imply greater downside risks. That said, I would like to see implied volatility build here with the ‘VIX’ index pushing towards 15, which would encourage the buyers to hold off for the time being. The battle lines are drawn.

USDJPY has been capped through Asia into ¥114, and some indecision is seen in the price action today, which makes sense when traders have priced in the NAFTA 2 agreement, and the equity tape is heavy. That said, US crude can’t be stopped right now, and we are seeing that trading $75.62 and +0.4%, while Brent crude is lagging a touch but still feels firm and holding the 85-handle. There has been a lack of data to drive through trade today, and the focus here has been on Japan five-year cross-currency basis swaps, which have incentivised traders to be long USDs of late. So, the fact we have seen swaps move a touch higher (i.e less negative) has taken some of the wind out of the USDJPY sails. Small buying in the JGB 10-year, which sits at 13bp has also been in play, but USDJPY is at a key juncture here and needs new news to take it through the figure.

The week's event risk ramps up from here, clearly culminating in Friday’s US payrolls where the focus is 100% on hourly earnings and whether the print can beat the 2.8%yoy expectations set in the market. More short-term and the European banking space will garner all the attention and could suggest JPY upside should implied vols kick up. That said, US-centric issues will also be a consideration, with Fed governor Powell due to speak in US trade tonight 02:45aest and he could influence interest rate pricing where the January fed funds future looks rock solid at 2.37% and therefore pricing in 19 basis points for the December meeting or a 76% chance of a hike. Whether the US bond market feeds off the European dynamics is another thing, with much attention on the long-end of the curve and the monthly chart of the 30-year US treasury and whether we are seeing clear signs that the multi-decade rally in the US bond market is over.